Master of the Universe

 
 

Diplomats, politicians and mining executives like to say that there is always heat and colour in the iron ore trade and this year is no different to any other. But the annual contract negotiations have never drifted on for so long without a resolution.

The Chinese Government has never before sent so much capital overseas as it did this year to intervene in BHP Billiton’s takeover bid for Rio Tinto. Resource prices have never been this high for so long, helping to make inflation the number one concern of the Chinese people, according to the Chinese Premier Wen Jiabao.

And Chinese industry leaders have never black-balled Australian exports and hurled insults at Australian mining executives quite like they have this year.

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“Their brains are bloated and their heads are full of water,” said Wu Xichun, the former chair of the powerful China Iron & Steel Association, referring to Rio Tinto holding out for a bigger price rise than the 65-71 per cent already agreed by Brazil’s CVRD.

Australia and its key trading partners in Northeast Asia are playing a game of brinkmanship that could easily spill over into the political arena.

Most of Australia’s long-term iron ore contracts will terminate on June 30 if no annual price agreement is reached by then. Nobody quite knows what will happen if the Australian majors then move to place huge volumes of ore on to the white-hot Chinese spot market, as they will be legally entitled to do.

Nobody knows how China will react if the Rudd Government rejects a major Chinese investment bid, or how Japan will respond if China succeeds in “locking up” key supplies by buying a major Australian miner. And nobody knows whether steel makers in China and perhaps elsewhere can dilute Australia’s market share by boosting supplies from elsewhere in the world, or if they can drum together an import cartel to fight what they see as a dangerous mining company oligopoly.

Demands by Chinese steel officials for “an orderly market” – code for asking for the Australian Government to somehow intervene to give China discount iron ore – are unrealistic. But Chinese corporations are occupying the high, open-market ground when they question why so many Chinese investment applications are stuck without resolution inside the Foreign Investment Review Board and the office of Treasurer Wayne Swan.

Swan has failed to make prompt decisions on a range of Chinese investments that are too small to conceivably challenge Australia’s national interest. His real test will come when Chinalco asks to increase its 9 per cent stake in Rio Tinto, or a Chinese company applies for permission to buy a major stake in Australia’s “third force” iron ore company, Fortescue, or an overseas steel maker moves to take a significant stake in BHP.

China’s top steel maker, Baosteel, is indeed toying with the idea of buying a chunk of BHP Billiton, although how and to what ends is far from clear.

“Large Chinese companies like Baosteel, Wugang and Angang hope they can come together to take a significant stake in BHP,” a top Chinese mining and steel official told The Diplomat. “But organising this is not easy.”

It seems that Chinese steel makers feel they need “to be at the table” even if that would give them no obvious power to affect the merger or resource pricing decisions when they get there.

Swan and his investment review board would then ponder whether such a Chinese shareholdings could influence management decisions and, if so, they whether they would threaten the national interest and should therefore be rejected. Already, Chinese corporate leaders wondering whether their investments are welcome in Australia anymore.

A senior executive at Shenhua Group, the giant Chinese coalminer, confronted Mr Rudd on the subject in Beijing in April, according to another Chinese executive who was at the meeting.

“Chinese companies have got a kind of feeling that we are encountering unfair policies,” said the executive. “We don’t want any preferential policies, we just want fair and open competition.”

Some suspect that the Rudd Government’s anxiety about Chinese investment reflects the lobbying interests of BHP more than any clear-eyed analysis of Australia’s national interest. The BHP board does not want Chinalco to raise its stake in Rio at a time when BHP is trying to buy the company, and nor would it be comfortable with a major Chinese investor on it own share registry.

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